Cogo Group, Inc. (COGO)

Q3 2011 Earnings Conference Call

November 10, 2011 4:30 PM ET


Will Davis – SVP, Business Development and Chief Marketing Officer

Jeffrey Kang – Chairman and CEO

Frank Zheng – CFO


Matt Ramsay – Canaccord Genuity

Mark Tobin – Roth Capital Partners

Russell Cleveland – RENN Capital



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Ladies and gentlemen thank you for standing by and welcome to the Cogo Group Incorporated third quarter 2011 earnings results conference call. During today’s presentation all parties will be placed in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today Thursday November 10, 2011. And I would now like to turn the conference over to Mr. Will Davis, Chief Marketing Officer. Please go ahead sir.

Will Davis

Thank you and good afternoon everyone. I’m Will Davis, Cogo’s Chief Marketing Officer and I would like to thank you for joining us today to participate in Cogo’s 2011 third quarter earnings conference call.

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After the market closed today, Cogo issued a press release reporting unaudited financial results for the quarter ended September 30, 2011. This release can be accessed in the investor relations section of Cogo's website at

and on most other financial websites. 

The discussion today will be hosted by Jeffrey Kang, Chairman and CEO, who willdiscuss the Company’s business operations; Will Davis, our Senior Vice President of Business Development and Chief Marketing Officer, who will also comment on aspects of the business; and Frank Zheng, our CFO, who will report on the Company’s financials.

Before we begin, I'd like to remind everyone that the call today may contain forward-looking statements regarding future events and the financial performance of the Company. We wish to caution you that such statements are at present just predictions, and actual results may differ materially as a result of the risks and uncertainties inherent in the Company's business. We refer you to documents that the Company files periodically with the SEC, specifically the most recently filed Forms 10-K and 6-K, as well as the Safe Harbor statement made in today’s press release. These documents contain important risk factors that could cause actual results to differ materially from those contained in the Company's current projections. Cogo assumes no obligation to revise theforward-looking information contained in today's call.

At this time, I'd like to turn the call over to Jeffrey. Jeffrey, the floor isyours.

Jeffrey Kang

Thank you, Will, and thanks to everyone for joining the call.  I will focus on a few key points and leave plenty of time for Q&A.

Cogo’s third quarter revenue of $146.4 million was up 46% year over year and above the high end of our guidance range. We saw strong bookings in similar areas to Q2: Telecom, Healthcare, Smart Grid/Meters, 3G Smartphones and HDTV.   The continued credit tightening, particularly in the SME marketplace, has materially reduced our visibility and we have decided not to provide fourth quarter revenue or EPS guidance. However, we plan to stay profitable in this difficult environment. As we have indicated in previous earnings calls, the revenue shift toward our


customers negatively affects our gross margins and increases our working capital requirements.  

 We clearly see that our


customers are gaining share across our end markets versus their SME competitors. It is difficult to predict when the credit tightening situation will ease, but we expect it will be sometime in 2012. In the meantime, we will continue to work to gain share and expand our footprint so that we can be in an even stronger position when business conditions and visibility improve.  In these uncertain times, our customers and semiconductor partners, who are among the global leaders, are increasingly relying on our services and products and these strengthened relationships will benefit us once macro conditions normalize.   We are in a cyclical business and we have seen these cycles before and when the cycle turns, it can be abrupt and we will be in a position to capture the increased growth and margin.   

Our Non-GAAP EPS diluted earnings in the quarter were 16 cents, at the high-end of our guidance. Cogo posted a gross margin of 10.4% in the quarter as continued strength in telecom lowered our blended gross margin and we saw continued gross margin deterioration in both digital media and telecom segments. As we indicated on our August conference call, we expect these trends to continue in the fourth quarter and into 2012 as these industries mature. 

In the quarter, Cogo posted operating margins of 4.8%, roughly in line with our prior expectations. We are still investing in new hires and new sales offices in order to aggressively pursue scale. At some point in 2012, we would expect this market uncertainty to have lifted and we expect to be in an even stronger position to leverage our increased footprint. To be clear, I am investing aggressively in the business because I see tremendous opportunities in the marketplace and I have to take a longer term approach. The current market forces give us an unprecedented chance to aggressively consolidate the market to drive scale while others are cautious. Maintaining our current banking facilities in order to continue to finance our growth is a key priority for me over the next few quarters. 

Now on to some segment highlights. Full details are in the press release. 

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